ASEAN Marketing Journal • Vol. X • No.

1 • 2018 • 66-74

IMPLEMENTING DATA CLUSTERING TO DETERMINE THE

CAPITAL ALLOCATION FOR MICRO, SMALL, AND MEDIUM-SIZED
ENTERPRISES (MSMEs)

Amelia Hidayah
Department of Management, Faculty of Economics and Business,
Trilogi University
South Jakarta, Indonesia
amelia.hidayah@trilogi.ac.id

ABSTRACT

Abstract: N/A.
Manuscript type: Original Research.
Research Aims: Analyzing the investigated factors includes the firm size and the industry sector
that influence capital allocation for MSMEs using the K-means clustering technique.
Design/methodology/approach: The initial step for the research is the data preparation. It is
covering 20 sectors and consists of 6,666 pieces of data. The modified data are analysed using
the K-means clustering technique.
Research Findings: MSMEs are divided into three clusters, with each cluster exhibiting different
characteristics in terms of assets, sales, and industry sectors. However, the number of employees
was not found to be significant in the analysis.
Theoretical Contribution/Originality: The size of MSMEs is defined as the total assets, sales,
or number of employees. It should be considered by financial institutions when assessing the
viability of awarding a loan to that MSMEs. Moreover industry characteristics affect finance
institutions to grant a loan to firm.
Practitioner/Policy Implication: Financial decision makers, banks, financial institutions, and
government advisors alike can determine capital allocation for MSMEs based on the clustering
profile created in this study.
Research limitation/Implications: This study constructs MSMEs grouping model that relies
on investigated factors, including the firm size and the industry sector in order to determine the
capital allocation to MSMEs. The future research regarding the capital allocation schemes for
the MSMEs clustering profile are possible to do by adding new data, such as ownership type,
owner-manager characteristics, and macroeconomic factors.

Keywords: capital allocation for MSMEs, K-means clustering, MSMEs characteristics, MSMEs
financing, industry sector.

INTRODUCTION in the country. Moreover, Indonesia’s MSMEs

The Indonesian government supports the
development of MSMEs, since they have
become the backbone of the Indonesian
economy. Such enterprises account for 99%
of all enterprises operating in Indonesia, and
they have created a total of 107.6 million jobs
are responsible for generating more than
60% of the country’s gross domestic product
(GDP) (Indonesia Investments, 2016). Yet, the
Indonesian government is still trying to boost
the number of entrepreneurs in the country,
which lags behind other Asian countries, such
as Singapore, China, and Japan, in that regard.

66
 Amelia Hidayah / ASEAN Marketing Journal © June (2018) Vol. X No. 1
The Indonesian government helps MSMEs by
promoting their products through the creation
of a digital platform equipped with an online
marketing and e-payments system called
E-Smart MSMEs (News Desk, The Jakarta
Post, 2017). The government further aims
to assist MSMEs with product certification,
the purchasing of machinery and equipment
as a form of industrial restructuring, and the
promotion of local and international exhibitions
(News Desk, The Jakarta Post, 2017).
MSMEs contribute to economic development
in a number of key ways, including
promoting industrialization and district
development, job creation, more equitable
income distribution, incremental resource
usage, additional sources of foreign exchange
income, collaboration with mature industries,
and access to entrepreneurship training
(Statistics Indonesia, 2016). A large number
of MSMEs influence to Indonesia economic
growth. According to data from the Ministry
of Co-operatives and MSMEs, there are 59.3
million MSMEs in 2014: 98.75% are micro
businesses, 1.15% are small businesses and
0.1% are medium-sized businesses (as cited
in OECD, 2018, p. 21).
The performance of MSMEs has impressed
the government due to the significant
contribution they make to the country’s GDP.
Such enterprises are keen to more securely
position themselves as being vital to the
national economy, although they do still face
a number of difficulties. The process involved
in developing MSMEs is not straightforward
in the context of business unit growth. Indeed,
micro businesses are known to find it difficult
to transition into small businesses, while
small businesses are known to experience
difficulty when seeking to develop into
medium businesses, and so on. The difficulty
stems from a fundamental misunderstanding
of business profiling, since the characteristics
of a micro business, for example, are different
from the characteristics of a small business.
The notion of developing an MSME to the
next level involves consideration of the
growth factors that influence MSMEs. Hill
67
(2001) suggests that Indonesian MSMEs face
two key problems, namely financial problems
and marketing problems (as cited in Direktorat
Pengembangan UKM Dan Koperasi, 2016, p.
10). The Indonesian government implements
a marketing program that is intended to
stimulate the market, although the program
cease in 1998. In fact, the program is not
actually proved effective, since there is a
general assumption that MSMEs cannot
compete in the market. As all MSMEs need
to grow in order to be successful, their
financial position has been emphasized to be
an important factor during the development
phase (Cook, 2001; Ou & Haynes, 2006).
Financing methods have changed in line
with changes in the general business climate.
MSMEs have access to two potential sources
of finance, namely internal and external
financing sources. Internal financing sources
include the owner-manager’s personal
savings and retained profits (Wu, Song,
& Zeng, 2008), while external financing
sources include financial assistance provided
by family and friends (Abouzeedan, 2003).
He and Baker (2007) describe trade credit,
venture capital, and angel financiers as being
external financing sources, while Chittenden,
Hall, and Hutchinson (1996) consider formal
external sources to be represented by financial
intermediaries, such as banks, financial
institutions, and securities markets.
The availability of financing methods is
dependent on the growth cycle of MSMEs.
During the early phase, Berger and Udell
(1998) explain that the characteristics of
MSMEs include informational opacity, a lack
of trading history (Cassar, 2004), and a high
risk of failure (Huyghebaert & Van de Gucht,
2007). They hence have to rely on internal
funding sources during this phase. As MSMEs
begin to advance through their business
lifecycle, they change their capital structure
(La Rocca, La Rocca, & Cariola, 2011). When
they mature as a business, MSMEs boost
their trade through commercialization and the
ability to provide collateral. The objective is
to improve the creditworthiness of the firm
and to attract investors to inject money into
68 Amelia Hidayah / ASEAN Marketing Journal © June (2018) Vol. X No. 1
the business. This involves an automatic shift
from relying on internal financing sources
to relying on external financing sources,
including venture capitalists, trade credit, and
bank loans. Lastly, when MSMEs become
more advanced in terms of the transparency
of their business activities, they prefer to rely
on either equity, debt, or both (Abdulsaleh &
Worthington, 2013).
The likelihood of facing global competition
is a factor that should be considered by all
MSMEs, especially with regard to their
readiness to do so, since many international
investors seek to invest in Indonesia. Although
the Indonesian government has established
various programs intended to strengthen the
position of MSMEs, many have failed to take
advantage of such programs. Based on data
concerning the growth of wholesale private
banking in Indonesia, of all the MSMEs in
the country, only 36% have bank accounts
(Irjayanti, Azis, & Sari, 2016). This highlights
the lack of access on the part of Indonesian
MSMEs to many financing schemes (Irjayanti,
Azis, & Sari, 2016).
Gregory, Rutherford, Oswald, and Gardine
(2005) suggest that MSMEs financing cannot
be standardized. A study is conducted using
a sample of 292 Australian firms find that the
“larger” small firms are, the more they rely
on long-term debt and external financing,
including bank loans (Cassar, 2004). The idea
that the firm size influences the availability of
finance to a firm has been tested by Petersen
and Rajan (1994). They conclude that as firms
grow, they develop the ability to enlarge the
circle of banks from which they can borrow.
Moreover, they note that firms that deal with
multiple banks and credit institutions tend to
be nearly twice as large as those that deal with
only one bank.
Previous research suggests that firms exhibit
different characteristics. Therefore, the firm
type will affect finance institutions’ decision
to grant (or deny) a loan to a given firm
(Hutchinson & Michaelas, 2000, as cited in
Kurniawan, 2014, pp. 611-621).
Information is arguably the key driver of
the modern world. Data in an unstructured
form must be converted into a structured
form, namely information, if it is to prove
useful. Computers manipulate a massive
amount of data on a daily basis to extract
certain necessary information. Hence, the
concept of “Big Data” has been introduced to
businesses as a powerful form of technology.
The term “data clustering” refers to the
process of partitioning a set of data into a set
of meaningful sub-classes known as clusters.
Data clustering has numerous applications
in every field of modern life. For instance,
it serves to identify groups of related
records that can be used as a starting point
for the exploration of further relationships
(Harikumar, Rajgopal, & Soman, 2010). This
study uses the K-means clustering technique
to analyze the factors that influence capital
allocation. The investigated factors include
the firm characteristics, the firm size, and the
industry type.
LITERATURE REVIEW
Defining MSMEs
The Indonesian government has sought to
support MSMEs by establishing Law No.
20 of 2008 on Micro, Small and Medium,
Business. This defines MSMEs as follows:
1. A micro business is defined as a
business owned by individuals and/or
individual business entities that meets the
criteria of a micro business as stipulated in
the Act.
2. A small business is a standalone
business operated by an individual or a
business entity that is not a subsidiary or
company branch that is owned, controlled,
or part of a medium or large business,
either directly or indirectly, and meets the
small business criteria as stipulated in the
Act.
3. A medium business is a standalone
business carried out by individuals or a
business entity that is not a subsidiary or
company branch that is owned, controlled,
or part of a small or large business, either
 Amelia Hidayah / ASEAN Marketing Journal © June (2018) Vol. X No. 1
Table 1. The Definition of MSMEs
Business Category Net Assets (IDR)
Micro <= 50,000,000
Small 50,000,000–500,000,000
Medium 500,000,000–10,000,000,000
directly and indirectly, with the maximum
assets or annual sales proceeds as
stipulated in the Act.
The government also segregates the assets
and sales of MSMEs as described in Law
No. 20 of 2008, which is summarized in
Table 1.
MSME Size
The size of MSMEs is defined as the total
assets, sales, or number of employees.
Abdulsaleh (2013) argues that the idea of
the firm size affecting the activities and
growth potential of MSMEs is universally
agreed upon by researchers. As mentioned
above, Gregory, Rutherford, Oswald,
and Gardine (2005) suggest that MSME
financing cannot be standardized, while
the financial needs and options of MSMEs
are determined to a certain degree by size/
age, since only the firm size was found to
be a significant predictor (in some cases)
of the capital structure of MSMEs (as cited
in Abdulsaleh, 2013, p. 37). The size of an
MSME should be considered by financial
institutions when assessing the viability
of awarding a loan to that MSME. The
company size greatly influences the
structure of funding based on the fact that
larger companies have a tendency to apply
for higher loan amounts.
Industry Sector
A number of studies have found that
the industry sector influences the capital
allocation of MSMEs. Different industry
69
Annual Revenue from Sales
(IDR)
<= 300,000,000
300,000,000–2,500,000,000
2,500,000,000–50,000,000,000
sectors have different characteristics, for
example, the agriculture industry faces
different business risks when compared
to the banking industry, which in turn
indirectly influence the capital structure
of a business, including the asset
composition. Therefore, the firm type
will affect finance institutions’ decision
to grant (or deny) a loan to a given firm
(Hutchinson & Michaelas, 2000, as
cited in Kurniawan, 2014, pp. 611-621).
Abor (2007) indicates that MSMEs
in the agricultural sector exhibit the
highest capital structure and the highest
asset structure, while MSMEs in the
wholesale and retail trade sector exhibit
the lowest debt ratio and the lowest asset
structure.
K-Means Clustering Algorithm
According to this algorithm, the center
of the cluster (or centroid) is randomly
selected at an early stage from a collection
of data colonies (the population). Then,
the K-means are used to verify each
component within the data population and
to allocate the components to one of the
centroids previously defined on the basis
of the minimum distance between the
components (data) within each centroid.
The position of the centroid will be
recalculated until all the data components
are grouped into every centroid, and the
final step will determine a new centroid
position. This iteration will be performed
until a convergent condition is formed. The
K-Means clustering algorithm is depicted
70 Amelia Hidayah / ASEAN Marketing Journal © June (2018) Vol. X No. 1

Start

Define number of clusters k

Define centroid

Calculatet he distance from each

data/object to the center of a cluster
Yes

Group each object basedo nt he

minimum distance

Is there any
object to be
moved?

No

End

Figure 1. K-Means Algorithm

Table 2. Descriptions of the Variable in the Raw Data

Company Name Business name

Product Description Commodities that are produced by companies
Total Assets Sum of all current and noncurrent assets
Total Sales Total amount of sales annually
Employee Number Total number of employees working in companies
Survey Year Defined when Bank Indonesia conducted the survey to
obtain MSME-related data

Figure 2. K-Means Setting

 Amelia Hidayah / ASEAN Marketing Journal © June (2018) Vol. X No. 1 71

Table 3. Iteration History

Iteration Change in Cluster Centers
1 2 3
1 154974658.363 2347081.524 187627136.228
2 0.000 155533.545 144062705.657
3 0.000 265446.569 98178370.708
4 0.000 263860.366 68829065.244
5 0.000 507216.198 72018917.094
6 0.000 580847.891 42212703.387
7 0.000 267819.066 18569511.158
8 0.000 30853.389 2237984.364
9 0.000 18490.251 1455027.860
10 0.000 0.000 0.000

in more detail in Figure 1 (Nugraha &
Kusumawati, 2012, p. 4).
RESEARCH METHOD
Data Preparation
This step is designed to construct a
MSMEs profiling model that can be
used by financial decision makers to
determine the capital allocation to
MSMEs. The model relies on specific
variables, including the total assets,
sales, number of employees, and industry
sector. The MSMEs profiling analysis is
conducted using the K-means clustering
technique. The secondary data utilized
in the analysis (covering 20 sectors)
were obtained from the MSME site of
Bank Indonesia. The raw data consist
of eight variables and 6,715 pieces of
data concerning MSMEs, as described
in Table 2 below.
K-Means Clustering Process
The raw data were modified, which
involved checking for missing data
(empty total assets/survey year/employee
number) and removing such entries
from the dataset. The total modified data
account for 6,666 pieces of data. Then,
the modified data were analyzed using
the K-Means clustering technique. The
total assets, sales, number of employees,
and industry sector were used to perform
the MSMEs clustering. The analysis
was supported by setting the number of
clusters as three, the number of maximum
iterations as ten, and mark the distance
of each data point from the cluster center
(Figure 2).
RESULTS AND DISCUSSION
The iteration history shows the progress of
the clustering process at each stage. During
the early iterations, the cluster centers have
settled into the general areas of their locations,
while the last eight iterations make only minor
adjustments.
The final cluster centers are computed as
the mean of each variable within each final
cluster. They reflect the characteristics of the
typical case for each cluster.
1. The MSMEs in cluster 1 have more assets
and highest sales revenues when those in
compared to clusters 2 and 3.
2. The MSMEs in cluster 2 have fewer
assets and lower sales revenues when
compared to those in clusters 1 and 3.
3. The MSMEs in cluster 3 have the highest
assets of all the clusters as well as
moderate sales revenues.
72 Amelia Hidayah / ASEAN Marketing Journal © June (2018) Vol. X No. 1

Table 4. Final Cluster Centers

Cluster
1 2 3
Industry Sector 15 12 6
Total Assets in Million 44,737,700 257,404 185,966,205
IDR
Sales Revenues in Million 520,000,331 85,921 37,167,668
IDR
Number of Employees 3 3 3

Table 5. Distances Between the Final Cluster Centers

Cluster 1 2 3
1 N/A 521,813,654.510 503,063,486.148
2 521,813,654.510 N/A 189,374,799.135
3 503,063,486.148 189,374,799.135 N/A

Table 6. Number of Cases in Each Cluster

Cluster 1 3.000
2 6580.000
3 83.000
Valid 6666.000
Missing 0.000

However, the number of employees does not
have a significant impact on the clusters, since
it remains the same for all three clusters.
Table 5 shows the distances between the final
cluster centers. Greater distances between the
clusters correspond to greater dissimilarities
between them. Clusters 1 and 2 are the most
different.
A large number of cases are assigned to the
second cluster, which unfortunately involves
the least assets and the lowest sales revenues.
Cluster 3 has a low number of cases, the
lowest number of industry sectors, the highest
total assets, and moderate sales revenues.
Cluster 1 has the lowest number of cases, the
highest number of industry sectors, more total
assets, and the highest sales revenues.
Financial decision makers, banks, financial
institutions, and government advisors alike
can determine capital allocation for MSMEs
based on the clustering profile created in
this study. Another important consideration
during capital allocation concerns the industry
sector, for example, agriculture, forestry,
and fishery businesses could potentially
support food self-sufficiency programs,
and they require equipment and technology
to optimize their operational activities.
Indonesian national fishery production stands
at 12.29 million tons. Although fishpond
cultivation has contributed 1.1 million tons
to this total figure, demand has increased by
11%; therefore, the potential of the fishery
business should not be underestimated
(Kerjasama LPPI Dengan Bank Indonesia,
2015).
 Amelia Hidayah / ASEAN Marketing Journal © June (2018) Vol. X No. 1 73

CONCLUSION and lower sales revenues when compared

This paper demonstrates how MSMEs’
characteristics, total assets, sales, and
industry sector influence financial decision
makers’ approach to capital allocation.
Interestingly, the number of employees, as
an aspect of MSMEs’ characteristics, is not
a factor that influences the capital allocation.
In conclusion, MSMEs can be divided into
three clusters. The firms in cluster 1 have
more assets and the highest sales revenues
when compared to those in clusters 2 and
3. The firms in cluster 2 have fewer assets
to those in clusters 2 and 3. Finally, cluster
3 features a low number of cases, less
industry sectors, the highest total assets, and
moderate sales revenues. The future research
to determine capital allocation schemes for
the MSMEs clustering profile are possible to
do by adding new data, such as ownership
type, owner-manager characteristics, and
macroeconomic factors, is both desirable
and feasible. Such research should serve to
enrich the information available concerning
the determination of capital allocation for
MSMEs.

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